Why is the asset and wealth management industry riding the Tax Managed Services wave?

Jul 18, 2023

Tim Gerspacher
Insourced Solutions for Tax Leader, PwC US

Natasha Granholm
Vice Chair, Trust Solutions, PwC US

Growing reporting obligations, expanding complexity, and a shifting tax policy environment are taking center stage for tax functions. Inflation and cost cutting pressures also are creating hurdles—all while tax resources and talent are in shorter supply. To address these challenges, we’re seeing heightened interest in Tax Managed Services as a powerful tool for relief, especially in certain regulated industries such as asset and wealth management (AWM), private equity, energy, utilities, and insurance.

AWM leaders have been embracing the significant benefits of Tax Managed Services. While specific aspects of the AWM industry are driving this trend, other industries may find similar pressures—such as heavy regulatory burdens, talent shortages, deal activity, and cost mandates—making Tax Managed Services an attractive option to help meet their goals.

We recently sat down with Natasha Granholm, Vice Chair of PwC’s Trust Solutions, who serves as the leader of our AWM Tax Managed Services practice. We questioned Natasha about how and why Tax Managed Services is now a sought-after approach to address difficult tax challenges in the AWM industry, and set forth her answers below:

Escalating regulatory burdens: How much can tax handle?

A wide range of compliance and reporting requirements for the AWM industry is causing pain points. Global expansion and growth means that AWM firms should address an increasing number of tax laws in multiple jurisdictions. What’s more, many AWM firms continue to engage in cross-border acquisitions, divestitures, and other complex transactions and fund structures that require tax to sort through an even greater array of tax rules worldwide.

A host of stakeholders also are involved—funds and portfolio companies, as well as their investors, which may include business partnerships, tax-exempt entities, and private individuals, all of which have different tax treatment and situations.

Intensifying complexity is becoming a formidable hurdle—not just because of how the AWM industry operates. Regulatory burdens affecting the industry are changing frequently and becoming more nuanced and onerous to address. In the United States, for example, international reporting surrounding large business partnerships now is much more time-consuming, mandating 20 pages (or more) of data.

Making matters worse is an expected “ramp up” of audits for AWM companies due to the increased IRS focus on high-net-worth individuals and large business partnerships. Layering on top of the federal activity are the state filing tax requirements associated with annual compliance and amended returns that may be required after federal audit adjustments.

Are talent shortages making it difficult for tax to operate?

We’re seeing many tax executives in the AWM industry concerned that they do not have sufficient resources to fulfill their reporting, compliance, and planning obligations. The right talent is scarce. Deep knowledge is needed about how the industry operates, as well as technical know-how about applying tax regulations to AWM deal structures, including business partnerships.

Compounding the situation are the constant resource demands—no more “peaks” and “valleys” due to seasonal tax compliance burdens. Now there are year-round peaks with little to no valleys due to the needs of the business and key stakeholders. Many AWM life-cycle events such as new fund launches and investment exits occur throughout the year and require real-time tax planning and analysis.

Is tax aligning with broader business cost reduction efforts?

Many C-suites—not just AWM but across industries—are asking headquarter functions like tax to lower or keep the same operating costs. While the AWM industry is still growing through acquisitions, more strict boundaries on costs are occurring due to pressure on fees and the need to improve customer service and develop new products.

The result is that AWM tax functions may be feeling “stuck.” Demands are going up while resources are waning. To address these difficult challenges and create efficient, sustainable operations, tax executives may not have the budget to hire more talent (if they can find it), or even to invest in needed digital tools.

That same focus on better cost management could impact investments in tax technology. AWM tax functions are leaning in on automation, machine learning, and AI, but still may not be able to retain the latest digital tools. “Buying” cutting-edge technology may be too expensive. And the alternative of “building” needed technology may be problematic given the lack of resources and proper skill sets. An additional hurdle to the “buy or build” decision is the investment needed to upskill tax team members on how to use these tools.

Companies are leveraging Tax Managed Services as a holistic and tailored approach to fill these gaps and meet challenges head on

We’re seeing PwC’s Tax Managed Services fill these gaps using an effective combination of people, process, and technology, while lowering costs. Additionally, Tax Managed Services are flexible—either as a full-scope arrangement for many tax department obligations or for a specific function or task within the department (i.e., a “targeted” tax managed service).

There are many benefits of Tax Managed Services, which are driving its popularity with AWM companies. Here are a few examples that can make a difference:

Tax Managed Services take a holistic approach when tailoring resources to fit a company’s needs. Rebadging of company personnel to PwC may or may not occur, but if so, this talent may continue to support the same AWM company, sustaining valuable in-house knowledge and relationships. In addition, other PwC AWM industry teams may be directly accessed to supplement. PwC’s broader reach and larger pool for recruiting new talent (both on campus and experienced hires) can help consistently maintain the right mix of skills as tax resources become scarcer.
Data-driven processes, strategic resource allocation, and single workflow technology are the cornerstones of Tax Managed Services and can help lower compliance and reporting burdens. This can be especially valuable given the larger volume of reporting data typical of the AWM industry. At the same time, the know-how of PwC’s AWM Tax Managed Services team can help bring innovative process improvements to lay a foundation for operational readiness.
Many AWM companies have reaped the benefits of immediate access to PwC’s cutting-edge technology as part of a tax managed service. Tax Managed Services clients can gain an instant upgrade in their digital capability, rather than building a solution themselves. Partnership K-1 compliance tools and direct data feeds with administrators are a few examples.
Embracing Tax Managed Services has enabled AWM companies to reallocate resources to directly support business strategy. As compliance and reporting efforts are streamlined, this can “free up” time for more value-added tasks. For example, tax teams can focus on reviewing specific tax areas that can yield more cash tax savings, and evaluating tax efficient alternatives for investments.

The bottom line

We’re seeing significant opportunities for AWM companies, as well as many other industries, that embrace the Tax Managed Services trend. C-suite expectations for tax are rising: not only does tax need to run at peak efficiency at a lower cost, it also should strengthen its value contribution toward broader business priorities. Tax Managed Services can help deliver on these goals—a win-win for the organization.

^{PwC is highly experienced in helping our clients solve their most pressing tax issues. PwC’s Tax Managed Services solutions leverage our functional experience and give you access to advanced know-how, resources, and tools we’ve developed to help solve your most common pain points and align with your organization’s strategic priorities.}

^{PwC established the first dedicated tax managed service in the market about six years ago. Our expanding practice offers sector-focused Tax Managed Services solutions, including Asset & Wealth Management (AWM).}

^{To discuss how Tax Managed Services can help you meet your goals, contact Natasha Granholm and Tim Gerspacher.}